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Life expectancy has risen, but that trend has been accompanied
by declining fertility rates, triggering a rapid ageing of the
population across much of Europe.
Although Europe's demographic shift may be positive in terms of
environmental sustainability, it has significant implications for
the continent's economic health.
Governments will need to take steps toward long-term
sustainability, through investments in education and training,
reforms of the pension and healthcare systems, and efforts to boost
labour force participation.
The United Nations (UN) 2019 population forecast indicates that
all but 14 European countries will experience declines through
2050. While Western Europe will experience most of that growth,
many countries in Central and Eastern Europe (CEE) are projected to
undergo a significant drop, with especially dramatic population
declines in Lithuania, Bulgaria, Latvia, and Ukraine.
Even where populations continue to expand, shrinking birth rates
and improved longevity are triggering a rise in the median age. The
UN projects that eight southern European countries (Italy, Greece,
Spain, Portugal, Bosnia and Herzegovina, Malta, Croatia, and
Albania) as well as Poland will have a median age of 50 or more by
2050.
A high projected median age tends to correlate with low
fertility rates, which have dropped in Western Europe since the
2008-09 financial crisis amid financial uncertainty and rising
housing costs, forcing countries to rely on immigration to boost
the population. Germany, Austria, Switzerland, and Liechtenstein
were the only West European countries to see a higher average
fertility rate in 2015-17 than in 2007-09. In contrast, some CEE
countries have seen a significant strengthening of fertility rates
as living standards improve, with Russia, Lithuania, Latvia,
Hungary, and Belarus reporting especially marked gains. Still, 2017
World Bank data indicate that fertility rates remain below the
replacement level throughout Europe.
Economic implications of demographic change
Although positive for the environment, Europe's demographic
shift has negative implications for economic growth, as the
population decline is matched by steep reductions in the size of
the labor force. The EU's population aged 15-64 is already
declining, falling 1.6% from its 2010 peak by 2018. The bloc's
working-age population is projected to drop another 15.7% between
2018 and 2050.
The combination of improved longevity and low fertility rates
means that demographic pyramids are shifting, as the proportion of
younger, resource-generating residents declines and the share of
older, resource-consuming residents increases. Rising old-age
dependency ratios mean that the working population is forced to
support a growing number of retirees. The UN projects that several
southern European countries (Spain, Greece, Italy, and Portugal)
will face old-age dependency ratios above 65% by 2050, marking a
steep increase over 2010 levels of approximately 30% or less.
The population's ageing is already putting pressure on public
finances, straining the healthcare and pension systems and
endangering Western Europe's welfare model. The situation is
expected to worsen over the longer term. Increased fixed
expenditures on social welfare will limit room for investment in
innovation, thereby hindering growth in international
competitiveness.
What can be done to relieve the demographic
burden?
While there is no universal panacea for the continent's
demographic problems, certain steps can be taken to ease the
challenges and prevent the situation from worsening. Countries that
are now behind in dealing with the ageing population can learn from
those that are more advanced, helping to promote a sustainable
future.
Pension systems represent one prominent area for reform.
According to the 2018 Melbourne Mercer Global Pension Index
(MMGPI), which evaluates the pension systems in 34 countries
worldwide, the Netherlands, Denmark, Finland, and Sweden rank among
the five best countries globally in which to retire since
pensioners continue to enjoy a high quality of life. Moreover, the
four countries' pension systems are viewed as sustainable, in
contrast to those of other West European countries such as Austria,
Italy, Spain, France, Ireland, and Germany.
The only Emerging Europe country included in the MMGPI is
Poland, whose pension system is viewed as neither adequate nor
sustainable. Indeed, the social security systems in most of
Emerging Europe have not evolved enough to provide sufficient
resources to pensioners, many of whom are living in poverty or are
forced to supplement their meagre retirement incomes by working in
the shadow economy.
Aside from pension and healthcare reforms, demographic
challenges may also be alleviated by increasing the size and
effectiveness of the labor force. This can be accomplished by
boosting activity rates among the female and elderly populations,
improving education and training (including adult learning),
raising investment in new technology, and encouraging immigration
(and return migration) while ensuring rapid integration into
productive society. Importantly, Sweden has shown that higher
female labor force participation rates may go hand in hand with
higher fertility rates if steps are taken to invest in affordable
childcare and to encourage flexible work arrangements.
Europe is not alone
In measuring the success of demographic policies, it is
important to keep in mind the distortions created by declining
populations. For example, Japan's real GDP has risen only about 15%
since 2000 (less than 1% per year), making it one of the world's
least dynamic economies. However, growth looks considerably
stronger given that Japan's working-age population has been
shrinking steadily since 2000. The country's growth rate per
working-age population has been close to 2%, above the figures for
both the EU and the US.
Within the EU, the growth rate per working-age population has
been much faster among Emerging European countries. Among advanced
economies, Ireland, Sweden, and Germany have performed best, while
Italy, Greece, and Portugal have shown very poor results, signaling
urgent need for change.
Despite the grim outlook for many European countries, the
extensive list of policy tools that governments have at their
disposal underscores the uncertainty of long-term forecasting, as
there are many moving parts. Indeed, the outlook could improve
significantly with the right policy mix.
Posted 23 October 2019 by Sharon Fisher, Director, Global Economics